Calendar spread strategy update
Option Calendar Spread Update: Oh oh, GLD jumped up today along with the rest of the market. You’d think that if the stock market goes up because the economy is getting better than Gold would go down. Nope. So I guess the economy is not the reason the market is up today – contrary to what the news tells us.
As long as the dollar gets weaker, the markets and GLD will both go up.
But there was an interesting post on another blog Slope of Hope that showed graphically that Gold might be heading towards a retracement. Check it out if you are a Gold Bug.
OK, back to business. The up move today took GLD outside of our upside option Calendar break even.
Here’s what it looks like right now.
So what do we do? I don’t want to add more capital to this, even though that is an option.
Step 1. Take off the spread hurting us the most. Take off the 125 Calendar.
Step 2. Now that we are in a better position it is time to determine how to adjust. Easiest way: just add another calendar at a higher strike. We have two options: adding the 131 or the 132.
Here’s the chart when we add 131 call calendars to the 128s we already have:
In the middle of the graph we can still make about $450.
Here is the graph of the 128/132 Calendar:
The amount we can make on the 132 is lower: closer to $100 but the upside break even is farther away. The 133 Calendar is too far away and the profit at the middle of the graph becomes negative so that is not an option.
Which to choose? Depends on what you think GLD will do in the next week. I normally like to be out of Calendars the Monday or Tuesday before expiration (next week).
Option calendar spreads
If you think GLD will stay put or move down a little, the 131 makes sense. Otherwise the 132 is the best way to save this trade. If we do the 132, and GLD keeps moving up and gets to the break even we will be down about $670 which is around 17%. Right now we are down $450
But hold on! There is another option.
What if we take off the 128 as well and re-position the trade?
Here’s a graph of a 130 – 133 Double Call Calendar. I sold the 125 and the 128.
I think I like this one best of all: Break evens are 129.39 and 133.77 with the ability to make $400 in the middle of the graph.
Options calendar spread recap
Recap: GLD is outside the break even on our 125/128 Oct/Nov Call Calendars. I don’t think GLD will come back into our trade. I think it will stay outside the break evens and so I need to adjust.I am adjusting by selling both the 125 and the 128 Call Calendars for a credit. I entered the trade with a debit. And then I am repositioning the trade by buying the 130 and 133 Oct/Nov Call Calendars. I now have new break evens and the ability to make a decent return.